Silver Linings to Low Prices

Posted on 08/01/2017 11:39 AM

As I type, corn is currently down 8 while soybeans are down 32. It is August 1st and trade has determined at this point in time there is not enough concern surrounding production to warrant much in the way of buying.

Now before you toss the computer out the window or start to draft a letter of hate, let me finish. Of course there are areas of concern. USDA has already agreed when it comes to corn yields this is not last year. And while a nearly 171 bu. per acre yield seems more than ambitious at this juncture, USDA has made it clear in their new yield forecasting model (I say new, it's been around for a few years now) they will wait to get boots on the ground in fields before they make any major adjustments in their yield outlooks.

Agree or disagree with the USDA, their estimates tend to be the driving factor behind speculative interest. The mere idea yields are down at this point in the year does little for the market if the USDA does not agree-and it seems any time buyers have made their way into the market with the expectation the USDA will 'catch on' to what is actually happening in the Corn Belt enthusiasm has ended in the release of a surprisingly bearish report. Go back to March of 2015's planted acreage report and you will see the trend of bullish expectations ahead of the USDA have ended badly nearly every time.

This pattern lacking bullish information combined with a general idea that we just have 'too much' supply is a cloud looming over the market at this point. While it is possible we will see bullish adjustments to yields and potential increases in demand over the next several months the market is likely to continue to feel pressure in the short-term without a USDA or FSA surprise next week.

While this may seem incredibly depressing to you, especially as you watch your crops struggle understand that low prices in August aren't necessarily a bad thing.

Again, before you start up that email machine to send a nasty note let me finish. There are a few things going on in the current market structure that are dependent on lower prices and could likely turn into supportive market factors in the long-term if lower prices stay in place here in the short-term.

First things first... let's look at South America. Farmers in portions of interior Brazil responded resoundingly to record corn prices paid last summer after the country experienced a drought, planting a record amount of Safrinha corn. This increase in plantings combined with reasonable weather and big yields-comparatively speaking--has resulted in more corn than needed in some locations. As a result of this shift in available bushels some farmers down there are seeing prices as low as $1.34 a bushel.

With prices so low, many farmers in Brazil are seeking alternative storage as opposed to selling, saying they'll wait for higher prices. Not selling because prices are low is taking place in both corn and soybeans, but low prices aren't the only reason farmers are holding on to supplies. Uncertainty over economic conditions and lack of faith in the government has many farmers holding tight to stocks as a hedge against potential inflation. If something negative were to happen economically speaking and their currency were to weaken against the dollar their buying power would be reduced, but their ability to sell their crops for a higher value in dollars would remain.

Relatively tight farmer holding combing with a stronger currency has resulted in higher prices for crops being sold out of ports. Surprisingly we've seen bean offers out of the United States at lower values than Brazilian offers, something nearly unheard of in August. And while at this point Brazilian corn offers are cheaper it will be interesting to see what continued low prices could do to the idea that farmers will dump corn in to the pipeline without a second thought.

In addition to low prices having the potential to keep grain to home, it also has the potential to slow expansion. Many farmers in Brazil are determining what they will plant at this point, with some looking to start soybean planting as early as mid-September. While the cost of living is much cheaper in Brazil and folks will discuss how farmers can live on less, higher costs with reduced income will cause anyone to stop and reflect.

So while low prices in August may not curb current South American acreage in production it will definitely limit or at the very least slow expansion.

Here at home, low prices have their own silver lining, as a slowing in selling tends to at the very least help to firm basis values. And while small moves in basis do little to offset big moves lower in the market, those of you with hedges or futures only contracts in place will benefit from a stronger value-especially in those areas facing potential production shortages.

Lower values do tend to help improve margins and encourage continued strength in demand as well. A lack of strength in futures should continue to allow our beans and corn to be competitive on the global market-especially if the Brazilian farmer continues to hold on to supplies. In addition to export competitiveness grind and feed margins are slightly improved as well allowing for strong 4th quarter usage as we work our way towards harvest.

In the end, while I realize that low prices and big downward moves feel like a kick straight to the teeth, it is important to focus on the silver linings this cloud possesses. Any type of increase in demand or a thought of discouraged production growth helps us to find an equilibrium in price much quicker. For those of you with enough bushels sold to cover your cash flow or space needs it is important to keep in mind the amount of time you have left to make a pricing decision.

If the grain you have to move is covered and you believe eventually we will find production is in fact much lower you have time for the market to make that determination. Unfortunately for those of you without time on your side a frank discussion needs to be had with yourself and the members of your operation about what you're willing to risk.

As I said earlier without a big adjustment from the USDA or FSA next week it is possible we could continue to probe the downside whether the crop is hurt or not. And while I understand this very fact is more than frustrating determining what you're willing to risk versus what you're able to pocket currently will help more than anything in the long run. You need to prepare yourself for what the market is capable of doing, whether you agree with it or not.

As we move forward, we will begin to get a clearer picture of what is actually taking shape when it comes to both supply and demand. But for now being prepared to hunker down and weather (no pun intended) these late season market moves is key. Whether that means revising your original marketing plan in response to current conditions or simply ignoring current moves and the noise that goes along with them is entirely up to you.

As always don't hesitate to contact me with any questions, I am here to help! Until next time, may your weather be all that you need it to be and more.

You can find Angie on Twitter at @GoddessofGrain or email her.

 

The views, opinions and positions expressed by the author are theirs alone and do not necessarily reflect the views, opinions or positions of Pro Farmer.

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